New Issue Details

Cochin Shipyard (CSL), a public sector company under the ministry of shipping, is engaged in the business of ship building and ship repair. In addition the company also offers marine engineering training. The company caters to both defence clients as well as commercial shipping clients worldwide.

CSL was incorporated on March 29, 1972, and commenced operation in 1975 is the largest public sector shipyard and second largest shipyard in the country in terms of capacity. It was conferred with ?Miniratna' status in 2008 by the Department of Public Enterprises, Government of India.

The company as end of March 31, 2017 has two docks with the first one primarily used for ship repair and second dock primarily used for shipbuilding. While the ship repair dock that could accommodate vessels with a maximum capacity of 125000 dead weight tonnage (Dwt) is one of the largest in the country, the ship building dock can accommodate vessels with a maximum capacity of 110000 Dwt.

Cochin shipyard is strategically located along the west coast of India, midway on the main sea route connecting Europe, West Asia and the Pacific Rim, a busy international maritime route. In addition, its shipyard is located close to the Kochi port as well as to offshore oil fields on the western coast of India and relatively close to the Middle East.

The company in the last two decades has built and delivered vessels across broad classifications including bulk carriers, tankers, Platform Supply Vessels (PSVs), Anchor Handling Tug Supply vessels (AHTSs), barges, bollard pull tugs, passenger vessels and Fast Patrol Vessels (FPVs). The company is currently building India's first Indigenous Aircraft Carrier (IAC) for the Indian Navy and the company has also obtained a licence to build LNG carriers using the patented membrane containment system. As part of its growth strategy, it intends to diversify its product offerings to include vessels for inland water transportation. The company has also grown its ship repair operations and is the only commercial shipyard to have undertaken repair work of Indian Navy's aircraft carriers, the INS Viraat and INS Vikramaditya.

The company has relationship/worked with several leading technology firms in ship building industry including Rolls Royce Marine (Norway), and GTT (Gaztransport & Technigaz) SA (GTT). The company is one of the first Indian ship yard to obtain license from GTT to use the patented membrane containment system known as the Mark III Flex Membrane Technology to construct LNG carriers. This tie-up apart from enhancing its capability has enhanced its credibility in the international markets. The company's key shipbuilding clients include the Indian Navy, the Indian Coast Guard and the SCI. It has also exported 45 ships to various commercial clients outside India such as NPCC, the Clipper Group (Bahamas) and Vroon Offshore (Netherlands) and SIGBA AS (Norway). The company has also entered a MoU with Wartsila for setting up of a workshop within its premises.

The company was successful in its bid in a tender floated by Hooghly Dock & Port Engineers (HDPEL), a central public sector enterprise, for the upgradation, operation, maintenance and management of two of its shipyards at Salkia and Nazirgunge located at Howrah, West Bengal recently. The Ministry of Shipping, GoI approved the formation of a joint venture between the company and HDPEL on March 29, 2017. The board of the company has also approved the formation of a joint venture between HDPEL and the company on April 27, 2017 where it would invest Rs 22 crore towards the initial capital of the JV. However, the agreements in relation to this joint venture are yet to be executed. The HDPEL JV will present the company with several opportunities in building high speed ferry crafts, dredgers, ropax vessels etc.

Ship building division of the company for sound and efficient construction of vessels follows Integrated Hull Outfit and Painting (IHOP) system of construction as followed in Japanese Yards.

Shipbuilding order book of the company as end of March 31, 2017 consisted of eight vessels with an aggregate outstanding revenue value of Rs 2936.149 crore and outstanding ship repair order book was Rs 369.832 crore.

The company is in the process of constructing a new dock, a ?stepped' dry dock within the existing premises of the company at Cochin. This stepped dock will enable longer vessels to fill the length of the dock and wider, shorter vessels and rigs to be built or repaired at the wider part. The Company is also in the process of setting up an International Ship Repair Facility (ISRF) at Cochin Port Trust area. ISRF project includes setting up a ship-lift and transfer system. Construction of proposed dry dock and ISRF enable the company to build and repair new vessels models. ISRF targets to enhance Cochin Shipyard's ship repair capability by 70-90 ships per annum. While the stepped ?dry dock' is targeted to get commissioned by June 2020, the ISRF will partially commissioned (repair yard for 2 vessels with ship lift & transfer system) by February 2020. ISRF is targeted to fully complete by August 2022.

Net Proceeds of the Issue will be utilized for (i) Setting up of a new dry dock (ii) Setting up of an international ship repair facility (ISRF) and (iii) General corporate purposes. Of the net proceeds appox Rs 443 crore will be used for setting up of dry dock, approximately Rs 229.5 crore will be used for setting up of ISRF and balance for general corporate purposes.

Strengths

With around forty years of proven operational capability/Expertise in ship building and ship repair the company has strong customer relation and enjoys reputation in the market. The shipyard has built around 35 vessels in the last five years. By executing over 2000 ship repair projects including complex and sophisticated defence vessels, the company has emerged as a market leader in the ship repair segment with about 39% market share.

Focus on both complex defence ship building as well as relatively less complex commercial ship building helps the company to maximize opportunities present in both segments of the market while minimizing the execution/cancellation risk associated with highly cyclical commercial ship building.

CSL has inked number of strategic cooperation agreements with some of its key customers such as Lakshadweep Development Corporation (LDCL), Dredging Corporation of India (DCI) and Directorate General of Lighthouses and Lightships (DGLL) in ship repair business and this ensures steady business for routine and dry dock repairs of their ships/dredgers.

Shipbuilding order backlog of Rs 2936.15 crore though works out to 1.9 times of its FY17 ship building revenue, the order backlog only accounted for the conversion cost of IAC order. The company is eligible for cost plus mark up for all procurements in case of IAC order, where only Phase II is under construction and Phase III remains to be executed.

Favorable policy environment encouraging indigenous manufacturing along with capacity (including planned capacity) and capability to build diverse vessels/ships, the company is well positioned to capitalize on strong opportunities open up in domestic market. India is one of the top five defence spenders in the world and it is one of the largest importers of oil and gas globally. Indian Navy and Coast Guard have ambitious plans for a 200 ship fleet each and this is expected to increase defence ship orders during 2016-2021. Policy of encouraging domestic manufacturing in India under ?Make in India' scheme in defence and PSU procurement as well as policy initiatives such as granting infrastructure status to shipbuilding, granting right of first refusal to Indian shipyards for shipbuilding and ship repair work of the Indian PSUs and support through the new financial assistance scheme are expected to enhance the opportunities in domestic market for Indian shipyards going forward.

Defence Shipyards in the public sector with their limited capacity are currently sitting on large pending orders non proportionate to their capacity leading to delivery delays. Further they do not have the capacity to construct certain types of ships especially those of bigger dimensions such as the IAC. In private sector couple of its competitors such as ABG Shipyard, Bharati Defence and Infrastructure are in deep financial crisis with latter undergoing corporate insolvency process and its operations are closed. Thus CSL given its strong balance sheet is at an advantageous position in future orders placed by the Indian Navy and other Indian PSUs.

CSL enjoys location advantage as its shipyard is strategically located along the Indian west coast on main sea route connecting the Persian Gulf of Asia. Proximity to offshore drilling locations leaves the company well positioned to pitch for opportunities in rig buildings and repair business. Currently major share of the approx USD 12 billion global ship repair market is enjoyed by shipyards in Singapore, Dubai and Middle East.

Ship repairing dock of the company is running at full capacity and consequently the company has turned away certain new requests in FY17. Given the fact of margin in ship repair business is higher than ship building the timely completion of new ISRF apart from increasing the ship repair capacity by another 70-90 ships per annum will also free the existing ship repair dock to focus on large vessels thus maximizing revenue and profit.

Continuously profitable and dividend paid history in last five fiscals. The liquidity of the company is strong with cash and bank balance as end of June 30, 2017 stand at Rs 2003.21 crore.

All central public sector enterprises as per CPSE Capital Restructuring Guidelines, are required to pay a minimum annual dividend of 30% of profit after tax or 5% of the net-worth, whichever is higher, subject to the maximum dividend permitted under the extant legal provisions and the conditions mentioned in the aforesaid memorandum. The company paid dividend at the rate of 89.7% and 76.5% in FY17 and FY16 respectively.

Weaknesses

Most of the company's shipbuilding contracts are fixed-price contracts. Thus the prices of inputs, i.e., material and labour declines from the level forecast at the time of contracting the company is permitted to retain all cost savings but if input prices increases, it is also liable for the full amount of all cost overruns. In the case of IAC which is presently under Phase II construction, the yard effort (work scope) is covered under fixed-price contracts and all procurement is on a cost plus mark-up basis. With delivery period ranges from 18-72 months from the contract date, the company is prone to fluctuations in material costs. Thus any variance in input prices will either positively/negatively impact the profitability.

Global shipbuilding industry, especially commercial ship building, is a cyclical industry currently going through challenging times and the Indian shipbuilding is no exception to this. The commercial ship building industry is global in nature and dominated by shipyards with deep pockets and government backing in countries such as China, South Korea and Japan. The company's proposed new dock though enables it to construct larger ships other than VLCC, how successful the company despite recent restoration of shipbuilding subsidy in different format has to be seen given the surplus capacity in global ship building industry and resultant highly competitive market place.

Top two clients of the company, i.e. Indian Navy and Indian Coast Guard, account for about 82.43%, 89.92% and 84.57% of the company's revenue from operations in FY15, FY16 and FY17. Given the intense competition for limited orders in case of commercial ship building the company's reliance on defence orders to sustain going forward as well. Finalization of defence orders despite growing budget outlay is subjected to lot of government approvals and there won't be steady flow and it may more often delay or bunched together. Similarly procurement of large ticket domestic new building orders such as LNG Vessels etc continue to be delayed.

Delivery of IAC is delayed and according to recent CAG report is likely to be achieved only by 2023. The delay is due to various reasons ranging from late procurement of key parts to lack of design information and many changes to the design requested by Indian Navy, lack of experience on the part of Cochin Shipyard. The delays or disagreement in relation to this project may adversely affect the reputation and may lead to financial strain in the form of liquidated damages.

Post the construction of its proposed Dry Dock it will not be able to undertake any further expansion activities on existing premises due to a lack of additional space. Thus for future expansions the company may be forced to consider other Greenfield locations, which may not have the same location advantage.

Private Shipyards of the country have been allowed to bid for vessels used in defence-related projects under recent liberalization policy. The private shipyards quickly inked technology transfer/collaboration agreements with overseas players for various defence vessels and this has resulted in increased competition.

The Kochi port is a riverine port which is prone to higher than usual levels of siltation. Thus to keep the water channel functional for the use and needs of the company periodic dredging and maintenance is required. This requires incurring of additional expenditure compared to shipyards in other parts of India. Though CSL recovered such additional dredging cost in some special cases from clients such as Indian Navy in the past, that may not hold good in future as well especially in case of large commercial ships where its competitiveness will be eroded.

Valuation

CSL's revenue grew by 3% to Rs 2059.49 crore for the year ended March 2017. But its operating profit margin declined by 120 bps to 18.5% and thus the operating profit was down by 3% to Rs 380.20 crore. Eventually gained by higher other income and lower interest, the net profit was up by 7% to Rs 311.12 crore. The EPS for FY17 works out to Rs 23.0 on post issue equity.

The offer price of Rs 424-432 discounts the FY17 EPS by 18.4 times on lower price band and 18.8 times on upper price band. The listed comparable peer Reliance Defence Engineering has reported a net loss for FY17 and thus its EPS was in negative.

The EV/order book of CSL is at 1.2 times. The EV/sales and EV/EBITDA was 1.9 times and 7.6 times compared to 23.9 times and 183.8 times that of Reliance Defence Engineering.

Cochin Shipyard : Issue Highlights

Sector

Ship-building/repairing

Offer Size (no of Shares)

Offer for sale

11328000

Fresh Issue

22656000

Price band (Rs.) *

Lower

424

Upper

432

Post-issue equity (Rs crore)

135.94

Post-issue promoter (including promoter group) stake (%)

75

Issue Open Date

1/8/2017

Issue Close Date

3/8/2017

Listing

BSE, NSE

Rating

45/100

* A discount of Rs 21 per equity share on issue price will be offered to retail investors and employees

Cochin Shipyard: Financial Results

1703 (12)

1603 (12)

1503 (12)

Sales

2059.49

1990.01

1583.26

OPM (%)

18.5

19.7

5.6

OP

380.20

391.91

89.27

Other income

149.01

106.87

77.19

PBIDT

529.22

498.79

166.46

Interest

10.54

11.94

18.32

PBDT

518.68

486.85

148.14

Depreciation

38.51

37.19

37.70

PBT

480.17

449.65

110.44

Tax

160.11

166.44

48.53

Deferred tax

7.88

-8.54

-7.37

PAT

312.18

291.75

69.28

EPS (Rs)*

23.0

21.5

5.1

* on post issue equity of Rs 135.94 crore. Face Value: Rs 10# EPS can not be annualised due to seasonality in operationsFigures in Rs croreSource: Capitaline databases